Obillos vs CIR, GR No.

L68118
Facts:
Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124
and 963 square meters located at Greenhills, San Juan, Rizal and then consequently
transferred his rights to his four children (petitioners).
The petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda.
They derived from the sale a total profit of P134,341.88 or P33,584 for each of them.
Before the expiration of the five-year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate income tax. He considered the share
of the profits of each petitioner in the sum of P33,584 as a "distributive dividend" taxable in
full and required them to pay deficiency income taxes aggregating P56,707.20 including the
50% fraud surcharge and the accumulated interest.
The Commissioner acted on the theory that the four petitioners had formed an
unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b)
of the Tax Code.
Issue:
WON he four petitioners had formed an unregistered partnership or joint venture within
the meaning of sections 24(a) and 84(b) of the Tax Code.
Ruling:
No, the petitioners did not form a partnership.
The SC hold that it is error to consider the petitioners as having formed a partnership
under article 1767 of the Civil Code simply because they allegedly contributed to buy the
two lots, resold the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result
in oppressive taxation and confirm the dictum that the power to tax involves the power to
destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and
simple. To consider them as partners would obliterate the distinction between a co-
ownership and a partnership. The petitioners were not engaged in any joint venture by
reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found
it not feasible to build their residences on the lots because of the high cost of construction,
then they had no choice but to resell the same to dissolve the co-ownership. The division of
the profit was merely incidental to the dissolution of the co-ownership which was in the
nature of things a temporary state.
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of
itself establish a partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived". There must
be an unmistakable intention to form a partnership or joint venture.
In the instant case, what the Commissioner should have investigated was whether the
father donated the two lots to the petitioners and whether he paid the donor's tax (See art.
1448, Civil Code). We are not prejudging this matter. It might have already prescribed.